On 15 May 2018, Italy's Ministry of Finance announced the issuance of the Ministerial Decree of 14 May 2018, which provides guidance on the application of the arm's length principle in line with the OECD guidelines. The Decree is issued in relation to the amendment in 2017 of the definition of "normal value" for the purpose of the arm's length principle under Italian law, which includes that items of income arising from intercompany transactions carried out with non-resident associated enterprises are to be determined on the basis of conditions and prices that would have been applied between unrelated parties, operating in free competition and in comparable circumstances. The Decree covers:

• The definition of associated enterprises, which includes a resident company and a non-resident company where one participates, directly or indirectly, in the management, control or capital of the other, or the same person participates, directly or indirectly, in the management, control or capital of both companies (participation of more than 50% in capital, voting rights, or profits, or dominant management influence based on equity or contractual constraints);
• The notion of comparability, which includes that:
  • An uncontrolled transaction is considered comparable to a controlled transaction where there are no significant differences that affect the financial indicators used, or if there are differences, comparability adjustments can be made to eliminate or significantly reduce the impact of such differences, and;
  • The economically relevant characteristics or factors of comparability that must be identified/analyzed include:
    • The contractual terms of the transactions;
    • The functions performed, taking into account assets used and risks assumed, including how these functions relate to the broader creation of value within the MNE group to which the parties belong;
    • The characteristics of the goods sold or services rendered;
    • The economic circumstances of the parties and the markets in which they operate; and
    • The business strategy pursued by the parties involved;
• The allowed transfer pricing methods, including that the most appropriate method of the five standard methods of the OECD guidelines should be applied, although the traditional transaction methods and in particular the comparable uncontrolled price method are generally preferred, and that other methods may be used if it is proven that the standard five cannot be reliably applied in determining the arm's length price;
• Aggregated transactions, including that the arm's length price should generally be determined on a per transaction basis, but that transactions performed by a company may be aggregated for transfer pricing purposes if they are closely related or cannot be reliably separated;
• The arm's length range, which includes that transactions may be considered at arm's length if the financial indicators fall within a range based on multiple uncontrolled transactions, with an adjustment made if falling outside the range;
• Low added value services, including that taxpayers may apply the simplified method recommended by the OECD for determining the appropriate price for qualifying services, with a profit margin of 5% accepted on the costs of the services;
• Transfer pricing documentation, which includes that:
  • Documentation must be considered suitable in all cases where it provides the information necessary to perform an analysis of the transfer prices applied, even if the method or comparables selected by the taxpayer are different from those identified by the tax authorities; and
  • The presence of omissions or partial inaccuracies in the documentation that are unlikely to compromise the analysis cannot, in any case, lead to the documentation being considered unsuitable.

The Decree also includes that the Director of the Revenue Agency will update transfer pricing documentation provisions in line with international best practices and will issue further implementing provisions, considering updates of the provisions of the OECD transfer pricing guidelines.